PERKINS COlE LLP1201 THIRD A VENUE, SUITE 4800. SEATILE, WASHINGTON 98101-3099

TELEPHONE 206 583-8888 . FACSIMILE 206 583-8500

May 24, 2002

VIA E-MAIL AND OVERNIGHT COURIER

Attn: Section 352 MSB RegulationsFinancial Crimes EnforcementNetwork

U.S. Departmentof the TreasuryP.O. Box 39Vienna, VA 22183

Re: Comments of Costco Wholesale Corporation and Starbucks CoffeeCompany on FinCEN's Adoption of Interim Final RegulationsConcerning Anti-Money Laundering Programs for Money ServicesBusinesses

To Whom It May Concern:

On behalf of and counsel for Costco Wholesale Corporation ("Costco") and StarbucksCoffee Company ("Starbucks"), we are writing to formally submit comments regarding theadoption of the interim final regulations implementing Section 352 of the Patriot Act andrequiring the creation of a written anti-money laundering program for money servicesbusinesses.l For the reasons outlined below, Costco and Starbucks believe that the FinancialCrimes EnforcementNetwork ("FinCEN")should exercise its authority under Section 352(a)(2)of the Act to expressly exempt storedvalue cards from the regulations.

A. Background

Costco is a pioneer and leader in the membership warehouse industry with 389warehouses worldwide and over 33 million members. Starbucks is the leading retailer, roasterand brand of specialty coffee in the world selling coffee drinks and related products throughretail outlets worldwide.

Both companies have developed stored value card programs to create a convenient andefficient method for their customers to pre-pay for their merchandise and services. Eachcompany'sprogramis a "closed"system--the stored value cards may only be redeemed for thegoods or services of that particular company. Like most merchandise cards, the cards generallyare non-refundableand may not be redeemedfor cash.

1 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and ObstructTerrorism (The Patriot Act) Act of2000, P.L. 107-56 (Oct. 2001).

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B. Scope of Interim Final Rule

On April 24, 2002, the FinCEN published interim final regulations implementing anti-money laundering provisions of the Patriot Act (the "Interim Rule"). The Patriot Act madesignificant changes to the Bank Secrecy Act ("BSA") to provide additional tools to prevent,detect, and prosecute international money laundering. A key requirement of the Interim Rule isthe creation of a written anti-money laundering program. Institutions subject to the rule arerequired to implement such a program by July 24, 2002.

The Interim Rule applies specifically to "money services businesses" ("MSBs").2 Theregulations prescribe standards for anti-money laundering programs for MSBs as required bySection 5318(h)(1) of the Patriot Act. Specifically, each MSB is required to create an anti-money launderingprogram that includes,at a minimum:

/II the developmentof internalpolicies,procedures, and controls;

;jI thedesignationof a complianceofficer;@ an ongoing employeetraining program; and

an independentaudit functionto test programs.@

The program is to be tailored to the particular circumstancesof the MSB's industry. Theexact nature of the program must be commensuratewith the risks posed by the size and locationof the particular MSB and the nature and volume of the financialservices it offers.

Significant Departure from Historic Treatment of Stored Value

Under the Interim Rule, MSBs include sellers, issuers and redeemers of stored valueproducts.3 The rule's requirement that stored value MSBs create an anti-money launderingprogram is a significant, inconsistent departure from the historic hands-off approach taken byFinCEN under the BSA.

c.

To date, FinCEN has consistently exempted issuers, sellers, and redeemers of storedvalue from regulation under the BSA. First, in August 1999, FinCEN promulgated final rules

2 MSBs include most types of non-bank fmancial institutions: currency dealers or exchangers, moneytransmitters, check cashers, and issuers, sellers or redeemers of traveler's checks, money orders or stored value. 31C.F.R. § 103.11(uu).

3 "Stored value" means "funds or monetary value represented in digital electronic format (whether or notspecifically encrypted) and stored or capable of storage on electronic media in such a way as to be retrievable andtransferable electronically." 31 C.F.R. § 103.11(vv). However, if a company does not reach two financial activitythresholds, it is not considered a MSB by FinCENand the regulationsdo not apply:

"

the company does not sell stored value in an amount greater than $1,000 in currency or in m'onetaryorother instrument; orthe company does not redeem stored value or other instruments for an amount greater than $1,000 incurrency or monetary or other instruments from any person on any day in one or more transactions.31 C.F.R. 103.11(uu)(4).

"

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requiring MSB's to register with the Departmentof the Treasury.4 The purpose ofregistration isto assist supervisory and law enforcement agencies in the enforcement of criminal, tax andregulatory laws and to prevent MSBs from engaging in illegal activities. Although the fmal rulecontinued to treat stored value as a financial instrument and its issuers and sellers as financial

institutions under the BSA, the rule expresslyexempted storedvalue from registration.5 FinCENnoted:

This limited treatment of stored value -- which frees the industry fromregistration requirementsto which issuers and sellers of money orders andtraveler's checks will be subject -- eliminates the "chilling effect" on thetechnology industry to which commerce objected. The limited step that isbeing taken should create certainty as to the outlines of the Bank SecrecyAct's application to electronic funds equivalents, while allowing furtherdevelopmentsprior to any rulemakingthat deals with more specific issuessuch as, for example, exemptions for "closed systems" or smalldenomination stored value devices or terms for possible tailoredapplication of the registration or other Bank Secrecy Act requirements toaspects of these emergingpaymentproducts.6

FinCEN went on to note in the rulemaking that it did not believe it was necessary to excludeparticular "closed systems" or apply thresholdexclusionsbased on value because such a step wasmore appropriate in a separate rulemakingto specificallyaddress such issues and the applicationof the BSA generally.7

Similarly, in March 2000, FinCEN issued a final rule to implement various aspects of theBSA related to "suspiciousactivity reporting" ("SAR") by MSBs.8 Under the SAR Rule, a MSBsubject to the rules must report a transaction if the MSB knows, suspects, or has reason tosuspect that the transaction requires reporting.9 Although the SAR Rule applied to most MSB

4 Amendment to Bank Secrecy Act Regulations -- Definitions Relating to, and Registration oj MoneyServices Businesses, U.S. Department of the Treasury, FinancialCrimes EnforcementNetwork, 64 Fed. Reg. 45438(Aug. 20, 1999) [hereinafter"RegistrationRule"].

5 31 C.F.R. 103.41(a) (stored value cards issuers, sellers and redeemers exempt from FinCEN registrationrule).

6RegistrationRule, 64 Fed. Reg. at 45442.

7Id at 45447.

865 Fed. Reg. 13683 (Mar. 2000); 31 C.F.R. § 103.20.

9 Reporting is required within thirty (30) days after becoming aware of suspicious activity. Whether aparticular transaction requires reporting must be decided by the MSB based on all of the facts and circumstancesrelating to the transactionor pattern of transactionsin question.

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activities, FinCEN expressly exempted stored value products. 10 Reiterating its concerns from theregistration rule, FinCEN noted:

As noted in the preamble to the final rule on registrationof money servicesbusinesses, Treasury believes that a business that issues or facilitates thedigital transfer of electronically-storedvalue is a money services businesscovered by the Bank Secrecy Act. However, it is not appropriate, giventhe infancy of the use of stored value products in the United States, tofinalize a rule specificallydealing with suspicioustransaction reporting bynon-bankswith respectto storedvalue products at this time.II

FinCEN's forbearance from applying the BSA to stored value has been and continues tobe appropriate. The stored value card industry is still nascent though maturing. The impositionof an anti-money launder program would pose a substantial, if not impractical, burden on thesetypes of stored value cards. BSA requirements for stored value would create yet another andcurrentlyunnecessaryentry barrierto deploymentof this new industry and technology.

First, the most prevalent type of cards on the market are "closed," pre-paid merchandisecards such as those offered by retailers like Costco, Starbucks, Blockbuster, Home Depot, andthe Bon Marche to name a few. Many telephonecompaniesand civic transportationsystems alsoutilize pre-paid cards for their services. With the exception cards administered by universitiesand colleges, few stored value cards are redeemable by any party other than the issuer. Asexemplified by the pilot program conductedat the 2000 summer Olympics in Atlanta, the lack ofan "open" system derives, in part, from a lack of customer acceptance and familiarity with storedvalue products. In addition, the relative dearth of stored value products also is due from thecurrent burdens and uncertainties retailers face in administeringa stored value card system, i.e.,state banking. laws and money transmitter statutes. An additional layer of federal regulationswould almost certainly impede the growth of the industry.

Additionally, the type of cards issued by Costco and Starbucks do not pose a significantrisk of being used for money laundering. The cards are used for recurring, small dollar-valuetransactions -- compared to the type of threshold activity of which HnCEN has historically beenconcerned and applied to banks. It is difficult to imagine a scenario in which a party could useeither Costco's or Starbucks' storedvalue cards to launder or transmit money to a third party.

Finally, as a practical matter, retailers and their vendors are not currently equipped toimplement the type of programs contemplated by the Interim Rule. Retailers like Costco andStarbucks would struggle to assess how to implement a program that would be appropriately

10 31 C.F.R. 103.20(a)(5) ("Notwithstanding the provisions of this section, a transaction that involvessolely the issuance, or facilitation of the transfer of stored value, or the issuance, sale, or redemption of stored value,shall not be subject to reporting under this paragraph (a), until the promulgation of rules specifically relating to suchreporting. ")

I! 65 Fed. Reg. at 13690.

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."'1j tailored to their business activity, namely the sale of their own goods and services. Additional

guidancefrom FinCEN would be essentialto ensure compliance.

D. Conclusion

Based on the foregoing, the Costco and Starbucks urge FinCEN to consider thedisproportionateand anomalous impact that the Interim Rules would have on issuers, sellers andredeemers of stored value products and exempt stored value from the rules pursuant to FinCEN'sauthority under Section 352(a)(2) of the Patriot Act. Consistent with its prior position, FinCENshould undertake a separate rulemaking when the time is appropriate to consider the fullapplicationof the BSA to storedvalue products.

Sincerely,

ISI

John P. MorganAttorney forCostco WholesaleCorporationStarbucksCoffee Company

Perkins Coie LLP505 Fifth Avenue South, Suite 620Seattle, WA 98004(206) 583-8679

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